Employee Taxation

Tax rates and payment

Employment income is charged to both income tax (as 'general' income) and to Class 1 National Insurance Contributions. Tax and NIC are normally paid by the employer through the PAYE system, under which the 'notice of coding' makes adjustments for tax reliefs due and some tax due on other income. An employee who has overpaid or underpaid tax at the end of the year should complete a tax return and settle the liability as described in Personal Taxation, or claim a repayment.

If the tax underpaid is up to £3,000 and the 2014/15 tax return is submitted by 31 October 2015, or e-filed by 30 December 2015, the underpayment can be settled through PAYE for 2016/17 rather than being collected on 31 January 2016.

Class 1 NIC rates 2015/16

Employers and employees both contribute at rates dependent on the level of earnings during a weekly, monthly or annual earnings period.

week

month

year

LEL: lower earnings limit

£112

£486

£5,824

PT: primary threshold

155

672

8,060

ST: secondary threshold

156

676

8,112

UAP: upper accrual point

770

3,337

40,040

UEL: upper earnings limit

815

3,532

42,385

No NIC are payable by employee or employer on earnings up to the PT (employees) or ST (employer). No NIC are payable by the employer on earnings up to the UST for employees aged under 21 at the date of the payment.

Earnings between the LEL and the PT must be reported by the employer, and the employee receives credit towards the State Pension, but no employee NIC are payable.

Rates of NIC on earnings above the PT/ST depend on whether the employee is within the State Second Pension or is 'contracted out' as a member of a salary-related pension scheme.

Employee

Employer

In

Out

In

Out

PT/ST - UAP

12.0%

10.6%

13.8%

10.4%

UAP - UEL

12.0%

12.0%

13.8%

13.8%

Above UEL

2.0%

2.0%

13.8%

13.8%

A person with more than one employment can defer the payment of some employee NIC until after the end of the tax year. The total amount payable is then checked and limited such that the full 12% rate is only applied to income between the PT and the UEL. Many employers can claim an annual reduction in NIC of up to £2,000, regardless of the number of employees on the payroll. The employees' NIC is unaffected.

Employee benefits

Employee benefits are usually valued at a 'cash equivalent' and are then charged to income tax on the employee and Class 1A NIC (at 13.8%) on the employer. Employee contributions for private use usually reduce the taxable amount. The cash equivalent is generally based on the cost to the employer of providing the benefit, but the following are charged according to a statutory formula.

Cars provided by the employer: a percentage of the original list price of the car, depending on the CO2 emissions rating of the car.

Fuel provided by the employer for private use in a company car is charged without reduction for contributions unless all private fuel is paid for by the employee, in which case there is no benefit.

To calculate the taxable amount, the percentage used to calculate car benefit is applied to a standard figure of £22,100.

Vans provided by the employer for an employee's use are charged at a flat rate of £3,150. If fuel is provided as well, an additional £594 is charged. If private use of a van is restricted to home-to-work travel, there is no tax charge. The taxable benefit of using an electric van for private journeys is £630.

Use of other assets is charged at 20% of the original cost of the assets to the employer, or the value when first made available to the employee.

Loans of money that exceed £10,000 at any point in the tax year are charged on the excess of the official rate (3% from 6.4.2015) over any interest actually paid by the employee to the employer.

Main exempt benefits

Many employee benefits are not charged to tax. A full list cannot be given here, but some of the principal ones are:

providing one mobile phone, even with private use

subsidised meals available to all employees in a staff restaurant or canteen (subject to conditions)

the provision of 'green transport' such as works buses or the use of a bicycle for commuting

trivial benefits (e.g. flowers) worth up to £50 per employee

pension contributions up to annual limit (see Investment Reliefs)

payments of up to £5 a night for 'incidental overnight expenses' when staying away (£10 if abroad)

Exempt mileage allowances: employee's own car

First 10,000 business miles

Extra miles

Each passenger

45p

25p

5p

If the business journey is completed on a motorcycle or pedal cycle the tax-free mileage rates are 24p and 20p per mile respectively.

Exempt fuel-only allowances: company car

The 45p mileage rate is for business use of an employee’s own car. Where the employer provides the car, allowances should not reflect costs already borne by the employer. HMRC publish advisory mileage rates which are accepted as covering the cost of fuel for different engine sizes and fuel types. They change four times a year, so the current rates have to be checked at www.hmrc.gov.uk/cars/fuel_company_cars.htm.